With all the hype surrounding the Euro – and its recent move higher – there is some skepticism brewing of the single currency’s future against the higher yielding Australian dollar.  Other than fundamental drivers, there are some key technical indications that are lending signals towards a return to Aussie strength.

Fundamentally speaking, the Australian dollar is a much more sound currency – for now.  Just this week, the Australian economy showed the resilience in its labor market as the country’s unemployment rate dipped to a 6-month low.  For the month of December, the labor force also saw month over month growth that was more than 4 times what had been expected by market analysts.  The increase in employment will likely convince the country’s central bank to keep rate on hold once again – a follow up to the surprise decision earlier this month.  Central bankers led by Governor Glenn Stevens are beginning to see resilience in the economy as baseline manufacturing activity remains solid – against past expectations of a major slowdown.  This will give the Australian dollar the continued interest rate edge against a currency for the European region, that is expected to see another rate cut in the next six months – to 0.75%.

The interest rate differential is still impressive at 325 basis points between the two.

But more importantly, technical signals are showing a potential turn in the EURAUD currency pair – a cross pair that has been stuck in a relative range for the better half of the last two months.  Now, the price action seems to be running into resistance at 1.2300.  The barrier is being complimented by overbought indications in stochastic and the relative strength index – along with a MACD bearish divergence.  Although smaller than normal, the bearish divergence still lends some support as it shows a thinning of upward price momentum for the moment.

Minor resistance at 1.2283 is helping to strengthen the 1.2300, likely keeping the currency pair to consolidation ahead of the New York session close.  Should the barrier hold, we anticipate a minor corrective effort to 1.2222 in the short term – before bottoming out at major support of 1.2150.

Option traders could be looking ahead of the 1.06 call area – with anything below likely having major premia baked in already.

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